Pentagon Hit for Lax Oversight of $4.2 Billion Afghan Contract

Supreme Foodservice was paid about $455 million for airlifting fresh fruits and vegetables for U.S. troops in Afghanistan without military personnel ensuring the prices were “fair and reasonable," according to an audit. Photographer: Romana/AFP/Getty Images

March 4 (Bloomberg) -- U.S. Defense Department personnel
overseeing a $4.2 billion food supply contract, one of the
largest in Afghanistan, failed to prevent overpayments and
potentially incorrect charges, according to the Pentagon
inspector general.

Supreme Foodservice AG of Ziegelbrucke, Switzerland may
have been overpaid $124.3 million for transportation and
corrugated packing boxes, according to the report released late
yesterday. Pentagon personnel also had no assurance that
billings for another $103 million in boxes was accurate or
“even chargeable to the contract,” it said.

The company also was paid about $455 million for airlifting
fresh fruits and vegetables from storage areas in the United
Arab Emirates to Afghanistan without military personnel ensuring
the prices were “fair and reasonable,” according to the audit.

The audit was mandated by Congress in the fiscal 2008
defense bill and required the inspector general to identify
“potential fraud, waste and abuse” in contracts for logistical
support for Iraq and Afghanistan.

The Defense Department, State Department and U.S. Agency
for International Development paid $17.7 billion to about 7,000
contractors and aid groups from fiscal years 2007 to 2009 for
Afghanistan services, according to the Special Inspector General
for Afghanistan Reconstruction.

Supreme Foodservice AG provided food and non-food
distribution as required while Defense Logistics Agency
personnel “did not adhere” to federal regulations for making
contract provisions final “in a timely manner.” They also
failed to set up quality assurance and other procedures “to
monitor contractor costs and performance,” it said.

Contract Renewed

The Defense Logistics Agency as of last month has paid the
company $4.2 billion on a contract awarded in December 2005.
It’s been renewed in December for one base-year and two six-month options, said spokesman Michelle McCaskill in an e-mail.

A solicitation will be issued in April to compete future
work, she said.

“The Defense Logistics Agency works closely with the DoD
Inspector General, using IG audits as tools for maintaining or
improving the efficiency and effectiveness of its operations,”
she said. “We take each audit seriously and often implement
applicable improvements before the audit is publicly released.”

Principal Deputy Assistant Secretary for Logistics Alan
Estavez said in an e-mail statement, “We take seriously the
issues raised in the report which identifies potential, not
validated, overcharges in the administration of contracts and
will move to recoup validated overcharges.”

Recouping Overcharges

Still, “the report does not address this issue in the
context of wartime Afghanistan, where flexible decisions are
being made to ensure superior support for our forces, knowing
that any overcharges can be recouped,” he said. “This contract
supported a five-fold increase in troop levels in Afghanistan,
and increased the number of delivery locations from four to over
150.”

Troy Hughes, the U.S. government contracts counsel for
Supreme Foodservice, said in a e-mail the company has not
discussed the report with the inspector general or DLA
personnel.

The audit recommended that DLA in future contract
modifications review Supreme Foodservice “proposed profit rates
to ensure the rates reflect any reduced cost risks as a result
of more than four years of actual contract performance.”

Profit Rate

The company has claimed profit rates of 13 percent for
helicopter costs, 10 percent for fixed-wing aircraft and 9
percent for truck costs, the audit said.

Supreme Foodservice between December 2005 and December 2008
was overpaid an estimated $98.4 million for transportation costs
in part because the reimbursement rates “were significantly
higher than the rates needed to reimburse the vendor for costs
and associated profits,” the report said.

The company within that $98.4 million was overpaid about
$19.8 million for helicopter transport costs, said the audit.

Supreme also may have been overpaid a $1.8 million
performance bonus because Pentagon personnel didn’t adequately
review company claims.

The payment was based on records indicating the company
achieved a 99.4 percent order “fill-rate” during the six-month
period ending December 2008. The audit concluded that Pentagon
contracts officers reviewed only 1.6 percent of orders to
determine the high rate.